PINTAS IP Structure helps intellectual property owners to set up a most favourable and tax efficient corporate structure to own their intellectual property assets.
The objectives of IP Audit are:-
PINTAS IP Structure Service seeks to devise and implement an optimum corporate structure for IP based companies through the setting up of Intellectual Property holding companies incorporated in selected offshore jurisdictions in order to make the companies eligible for a minimum rate of withholding tax, little or no tax in the country of residence of the licensor or the property, and little or no withholding tax in the countries through which the intellectual property is licensed.
In the absence of careful planning, owners of intellectual property can find their profits seriously eroded by both taxes on profits and by withholding taxes.
IP as the Engine of Growth in Knowledge Based Economy:-
In the knowledge based economy of today, there is a growing trends to focus more on IP related activities, like brand building and R&D. Limited value added manufacturing activities, are routinely outsourced to third world countries. The value shifting trends can be illustrated by the diagram below.
For example, IP based companies like Nike has been actively outsourcing its manufacturing activities to low cost countries like Vietnam, China and Indonesia while at the same time spending millions developing, owning and promoting its brands and innovative designs.The establishment of IP holding company, therefore, is to capture the centre of gravity of corporate value is entirely consistent with the general value shifting trends in our knowledge based economy.
Tax Planning Through IP Holding Company:-
To achieve greater tax efficiency for the group, an IP Corporate Structure, which involves the establishment of a special purpose vehicle that holds all the vital IP assets of the company as shown in Diagram 2.1 is proposed.
The IP holding company will preferably be set up in jurisdictions that levy minimum taxation (usually less than 10%) for all royalty income accruing to the IP assets owned by the IP holding company. For greater tax saving, an intermediary company established in a tax treaty jurisdiction can be utilized to minimize withholding tax exposures suffered by payers of royalties. In the structure proposed, the IP holding company will emerge as a profit centre for the group where profits generated by the group operation will be parked. The other activities of the group like marketing and sale, manufacturing and production as well as research and development will be reduced to cost centers. One good example is the tax planning model by IKEA ( see Table 2.2)
Table 2.1: IP Holding Company
Table 2.2 IKEA Tax Model
Advanced Royalties Planning Through Intermediate Royalty Holding Company:-
Traditional royalty tax planning has involved transferring intellectual property (IP) to a company in a jurisdiction that imposes low tax or no tax on profits. However countries from where royalties are paid generally levy a withholding tax that can be as high as 30%.
It is important to take into account that if IP is transferred after it has become valuable, it likely that there will be capital gains tax implications on the disposal of the IP to the low tax company. It is therefore preferable to aim to transfer the IP to the intellectual property holding company while it is at a low value, or, alternatively, to ensure that the IP is developed by the company that is to ultimately own it.
Diagram 2.3 Royalty Planning: A Basic Structure
In the example shown in Diagram 2.3 above, ownership of the IP is held in an offshore jurisdiction where the tax rate on profits is zero. The offshore jurisdiction grants a sub licence to an intermediate royalty holding company in a tax treaty jurisdiction, which, in turn, licences the IP to a third party.
The Importance of Double Taxation Treaties:-
If a double taxation treaty exists between two jurisdictions, when royalties are paid the withholding tax rate will be no greater than the rate specified in the tax treaty between the tax treaty jurisdiction and the country paying the royalty. This rate is generally significantly lower than the standard withholding tax rate.
Intermediate Royalty Holding Company Location:-
The jurisdiction for the location of an intermediate royalty holding company should offer the following beneficial features:-
- Access to a large network of double taxation treaties
- Low corporate tax rate liability on royalties received
- The ability to pay-on royalties without withholding tax
- The eligibility of royalty payments as a deductible expense against royalty receipts
- The ability to get tax rulings on the margin to be retained in the intermediate company